Saturday, February 10, 2007

Environmental Sticks or Carrots

The buzz in environmental circles is the movement from governmental regulations to voluntary environmental improvements by business and industry. The controlling metaphor is moving from sticks to carrots. The emphasis is on the word voluntary as opposed to controls and regulation. Sounds good, we all like freedom. The metaphor misses the fact that regulation and ownership are functional equivalents. If I (or a group) own an opportunity, we can deny it to others and they therefore have a cost of doing without or buying it from me. Some have opportunities by private ownership and some have it by being the beneficiary of a regulation that keeps others from using the resource in question. The main difference between a regulation and ownership is that the beneficiary can’t sell it. It is a use value only. But, note that a group private ownership is much the same, an individual must get the agreement of all others and not just sell on their own. So, what are the examples of so-called carrots that are motivating business and industry to be green? One, consumers are more loyal to green firms (and in some cases are willing to pay more for their products than the same product produced by a brown firm (I just made up that term). Firms selling to consumers have always responded to consumer preferences, be it speed and mileage in an automobile or the fact that it was produced in a green building with grass on the top (true of a new Ford plant for example). Is the promise of increased firm profits in response to consumer demand a stick or a carrot. The metaphor breaks down on closer examination. On the one hand the promise of greater profits looks like a carrot, but the promise of consumer exit from purchasing the brown product is punishment much like a stick. One of the most famous contemporary consumer boycotts was of grapes organized by people wanting better wages and working conditions for migrant farm workers. The vineyard owners probably regarded the resulting lower sales as a stick. Of course, we know from behavioral economics that a dollar coded as a loss is psychologically larger than a dollar coded as a gain. When the vineyard owners gave in and paid higher wages, it was not voluntary. A more significant boycott (or an equivalent sit-in) was that of Blacks who sat at lunch counters demanding to be served. There purchase might be called a carrot, but it was not seen as such by the store owners. It was coded as a stick and one that was resisted strenuously with the help of the police in some cities. When the store owners finally gave in, it was hardly voluntary. A second example of a claimed carrot is when a firm improves its present environmental impact in anticipation of a future governmental regulation. It is hard to see this as fundamentally voluntary. A third example is the trading of carbon units. This is advertised as a market solution to environmental problems. Most everyone regards market actions as voluntary and the results as desirable. But, why do these units have value? Either there is a cap on emissions in place and the firm does not already own enough units, or the firms expect caps to soon be in place. A cap is a form of ownership right. Any use of the environment for waste beyond the cap is owned by the public (make that the environmental interests within the broader pubic). The public may choose to sell some its allocation, but that depends on the rules for group action and those with high values don’t want to sell. To own is to have a stick that prevents non-owners from using the resource. The big issue that has not had enough attention is why the public accepted such a low cap allowing polluters to own a great deal of the resource. This question somehow gets lost in the celebration of voluntary market solutions. There is no market without a prior allocation of ownership sticks. In the words of Warren Samuels, a market is an arena of mutual coercion. A fourth example are the subsidies available for some kinds of environmental practices and energy conservation such as those for hybrid cars and ethanol. This is truly a carrot, but one financed by taxpayers. And not all are willing participants—some prefer lower taxes to environmental improvement—some much for complete voluntary action. Another example of voluntary carrots is the preference of the owners and CEOs of corporations. Some just spend the firm’s money on environmental improvement because they think it is the right thing to do—even if it did not bring new or more loyal customers. This is truly deserving of the term “voluntary.” It may be the same thing as when the CEO spends the firm’s money on the local symphony orchestra because a spouse likes classical music. This may explain the U.S. Postal Service sponsoring a team in the Tour de France—hardly the best return on its advertising dollar. Some of the stockholders of these beneficent CEO’s may not be volunteering their support, but merely going along with the separation of ownership and control in big corporations. What is the point? It would be a mistake for environmentalists to be taken in by the myth of markets and voluntarism. The need for a well funded and authorized EPA will not disappear any time soon. I doubt that the big carbon emitters such as the coal burning electric utilities are going to volunteer to reduce emissions. I have not seen them pressuring the government to endorse the Kyoto Protocol. I read the other day that the State of North Carolina was suing the TVA because its coal burning generating plants were dumping into air reaching North Carolina. Maybe TVA customers will want to pay more for electricity and pressure TVA management to reduce emissions for the health of North Carolinians. None of us should hold their breath. This is not to take anything away from firms such as the Interface Carpet Corporation and its CEO (and owner) Ray Anderson who has reduced its emissions of harmful chemical. Or of the pizza shop owner who has redirected the heat of its ovens to heat water.